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Ah, Youth: Tough Times for Start-Up Tool Companies Means Toughing It Out

SAN FRANCISCO, Oct. 4 - As established and hope-to-be-established companies show off their wares in Bostonat TIGR's annual GSAC meeting this week, entrepreneurs nursing newborn firms or just big ideas gathered on the opposite coast looking for money.


More likely than not, however, advice was what they received instead of much-needed capital.


Persevere and prosper


'Times are tough, though this too shall pass' was the message broadcast by venture capitalists and institutional investors sitting on panels and strolling the halls at the Early Stage Venture Investing Conference and Bio's VentureForum here this week.


"People who invest in tools are taking care of their own; they don't want to take on any new babies," said Casey Lynch, CEO of fledgling Aspira Biosystems. "We are one of the only tool companies presenting here [at VentureForum] because VCs don't want to hear from tool companies. Everyone wants late-stage therapeutics."


Even established companies are hearing the investment community's siren call for drugs, drugs, drugs.


"We used to be a functional-genomics company, went to a few investors' meetings, and now we're a drug-discovery company," Brian Cunningham, CEO of Rigel Pharmaceuticals, announced only half in jest to a room full of entrepreneurs.


South San Francisco, Calif.-based Aspira, with molecular-imprinting technology it is using to develop protein chips, aims to be "Affymetrix for proteins," said Lynch. She said the company, which received 'friends-and-family' funding in 2000 and completed a Series A round in 2001, is pushing for the next financing round. But it has been difficult. She said the only reason the company was given a presentation slot at the conference was that their VC had lobbied hard for their presence.


"Early-stage funding is at a crisis right now, angels and VCs have changed focus or are not investing," agreed Phyllis Gardner, an associate professor of medicine at Stanford and a Genomics Collaborative cofounder.


However, things are not all doom and gloom: Many long-time investors discount the current infatuation with late-stage drug companies as just another fad. Additionally, they see the current downturn in public markets--which makes money-making IPOs less of an option for investor's looking to make a quick buck--as well within the historical ups and downs of the market, and see no reason to change investment strategies.


"We can't abandon the early-stage part of the business," said Dan Janney, managing director of Alta Partners, a San Francisco-based venture-capital firm. "It's our life blood."


"Fund raising now is a difficult thing, but it's a long-term business," offered Rod Ferguson, managing director of JP Morgan Partners. "I don't think there are acute pressures to change."


Quit whining


Indeed, determining investment strategies based on the current market is taking cues from the wrong direction, say investors. As Fergusonsays: "The public markets are a rear-view mirror." In fact, some well-seasoned investors see the current vogue toward existing drug-development companies as an opportunity for startup tool providers.


In the "industry as a whole, therapeutics is the flavor of the month. That's where the sheep [VCs] are. If you want to find the sheep, look at therapeutics," said Jonathan MacQuitty, director of Palo Altoventure-capital firm Abingworth Management. But "VCs are not a homogenous group," he continued. "There are sheep out there, but not all. We do not subscribe to the view that tools have no value."


MacQuitty and others say now is the time to be investing, with better terms available for investors and thus a greater possible upside. "We're doing more investment now than two years ago," he said. "Values are better now. We're doing three times as many deals."


Remi Barbier, CEO of Pain Therapeutics, agreed, and added there is a false perception of return on investment with therapeutics. It "takes a whole lot more cash to add value to a compound than to develop a tool."


There are "cycles in the biotech industry when things are good and not good," MacQuitty pointed out. "We happen to be in bad times right now. It is harder to raise money, valuations are not so good. [But] this too will pass."


And in the mean time, entrepreneurs take heart: Investors like MacQuitty are still "interested in good teams with good ideas."

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